It’s a race to the bottom; to be the cheapest. In Woolworths parlance it’s “Cheap Cheap” whilst over at Coles aging rock-stars are pointing “Down Down” at their genitals with large red hands. The two dominant players in the Australian supermarket industry are engaged in a price war and most of us won’t bemoan the fact that both have decreased their prices over the last three years – Woolworths by 11 per cent and Coles by 6 per cent.
However, there is a cost to be borne in what most would view as healthy competition. Consider the plight of their channel partners; farmers, manufacturers, processors and distributors. Coles and Woolworths are the 19th and 15th biggest selling retailers in the world and, between them, command a staggering 74% market share of our supermarket/grocery sector. They both wield incredible power over their channel partners with a number of cases exposing their questionable behaviours.
Both companies spent a good deal of 2014 defending their behaviour against actions brought against them by the ACCC. Late last year Coles was fined $10 million plus $1.1 million in costs for two separate claims concerning allegedly unreasonable demands for payments from its smallest suppliers. At the same time Woolworths was being investigated and roundly condemned for its pressure on produce growers to contribute 40c per crate to pay for a Jamie Oliver advertising campaign. This is on top of the 2.5% of sales growers are already paying as a “marketing fee”! There was ample evidence that many farmers paid purely out of fear of losing contracts.
Earlier in the year Coles lost a court case where they had claimed that bread was “fresh baked” when in fact the raw ingredients had been imported frozen from Ireland. Another local supplier had been replaced!
The instances that are front of mind with most of us, however, are the $1 milk and 85c bread campaigns that both companies promoted. The cheap milk campaign in particular led to significant reductions in farm-gate returns and threatened the livelihood of many farmers. They were receiving 20c-30c per litre of milk from both companies which is actually below the cost of production – simply unsustainable.
The pressure on producers to deal; with “Colesworths” is enormous and leads to other bizarre outcomes. Contract farmers are forced (contractually) to be ready to fill the largest possible order from the retailers. In reality most orders are smaller and the grower is forced to destroy the balance of the crop not purchased. Finally, “home Brand” or private label products have their own drawbacks. The chosen supplier must supply the product at vastly reduced margins and a further consequence is that there is less room on the shelves for smaller independent brands to gain exposure.
Coles and Woolworths would argue that they are merely responding to customer demand and, from a scientific view, they both do so very successfully. However, next time you buy your “cheap cheap” milk or bread, or standardised fruit and vegetables that are priced “down down” will you ask yourself what the real cost is?